Friday, 22 July 2016

Brexit causes dramatic drop in UK economy, data suggests

Britain’s decision to leave the EU has led to a “dramatic deterioration” in economic activity, not seen since the aftermath of the financial crisis.

Data from IHS Markit’s Purchasing Manager’s Index, or PMI, shows a fall to 47.7 in July, the lowest level since April in 2009. A reading below 50 indicates contraction.

Both manufacturing and service sectors saw a decline in output and orders.

However, exports picked up, driven by the weakening of the pound.

The report surveyed more than 650 services companies, from sectors including transport, business services, computing and restaurants.

It asked them: “Is the level of business activity at your company higher, the same or lower than one month ago?”

For manufacturers, it asked whether production had gone up or down.

The PMI is the first significant set of data measuring business reaction to the result of the UK referendum.

‘Record slump’

Chris Williamson, chief economist at IHS Markit, said the downturn has been “most commonly attributed in one way or another to ‘Brexit’.”

One of the PMI indexes shows companies such as insurance or advertising, are feeling less positive

“Given the record slump in service sector business expectations, the suggestion is that there is further pain to come in the short-term at least.”

Mr Williamson added that the economy could contract by 0.4% in the third quarter of this year, but that would depend on whether the current slump continued.

“The only other times we have seen this index fall to these low levels, was the global financial crisis in 2008/9, the bursting of the dot com bubble, and the 1998 Asian financial crisis,” he told the BBC.

“The difference this time is that it is entirely home-grown, which suggest the impact could be greater on the UK economy than before.”

“This is exactly what most economists were saying would happen.”

Analysis: Andrew Walker, BBC World Service economics correspondent

The figures in PMI surveys are taken seriously by economists as early warning signs of what is in the pipeline. When there is a downturn, the PMIs generally tell the same story.

So this is a troubling set of results. But it is just one month’s worth. It is possible that this is a “shock-induced nadir”, as the chief economist at the firm who conducted the survey put it, and that the economy will right itself in the coming months.

In addition, the financial markets have stabilised and in some areas rebounded, in an adjustment after the vote that was described by the IMF as severe but generally orderly.

That said, the survey results do increase the chances of some action from the Bank of England, perhaps an interest rate cut in August, or perhaps even some additional spending plans in the chancellor’s Autumn Statement.

‘Heading for recession’

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the figures provided the “first major evidence that the UK is entering a sharp downturn”.

Although he added that the “confidence shock from the Leave vote might wear off over the coming months”.

Neil Wilson, markets analyst at ETX Capital, said he thought the UK was “heading for a recession again”, and that the data would almost certainly prompt the Bank of England to roll out further stimulus.

The pound has fallen in response to the publication of the data.

The UK’s new chancellor, Philip Hammond, urged caution.

“Let’s be clear, the PMI data is a measure of sentiment, it’s not a measure of any hard activity in the economy.

“What it tells us is businesses confidence has been dented, they’re not sure, they’re in a period of uncertainty now.”

Earlier on Friday, Mr Hammond said that he might “reset” Britain’s fiscal policy.

‘No surprise’

While IHS Markit’s reading on the UK economy was worse than most analysts expected, its verdict on the wider eurozone economy was more cheery.

Although business confidence dropped to an 18-month low, the overall pace of economic growth was in line with pre-Brexit trends, and employment across the eurozone rose.

The optimistic outlook is in line with comments by made by the president of the European Central Bank (ECB), Mario Draghi, who said on Thursday that Europe’s financial markets had “weathered” the uncertainty caused by the vote.

Europe Economics’ Andrew Lilico, who argued during the referendum campaign that leaving the EU would be beneficial for the UK in the long term, told the BBC the PMI data was “no surprise”, and that it “doesn’t tell us much about what Brexit’s longer term impact will be”.

Mr Lilico said he always expected a short term reaction, and those who voted to leave, “expected a short term slowdown too”.

The downturn, he added, was “associated with risks in the global economy,” as well as Brexit.